NAVY FAMILY SERVICE CENTERS OF HAMPTON ROADS



NAVY FAMILY SERVICE CENTERS OF HAMPTON ROADS

PROGRAM FACILITATOR'S GUIDE

TITLE: Understanding CSB/REDUX and TSP

DATE: January 2001 (Little Creek)

Note: This program contains more material than can be presented in a normal 50 minute program. It includes extensive background information both to fully inform presenters and to allow for a more extensive briefing if a prospective audience (such as a PSD or a group of Navy career counselors) should request one. If all material were to be presented, the program would be approximately 90 minutes in length; this would also be appropriate at an all-comers evening program at NFSC. It is expected that most presentations will be a standard 50 minutes. Some sections have been listed as “optional” and may be added when more time is available. FEs at each center should be prepared to consider the needs of their specific target audience prior to each scheduled program, and modify the power point presentation accordingly by hiding or including frames as appropriate.

I. Introduction. (USE OVERHEAD #1)

A. Introduce self, financial education background.

B. Purpose. State purpose: The purpose of this program is to provide information on recent changes to the military retirement system, and explain how to use this information to plan for your future.

C. Motivation. (USE OVERHEAD #2) Retirement is something most service members seldom think about, particularly early in their careers. Command mission priorities take precedence, work and deployment schedules are hectic and time consuming, and many service members feel what little free time they do have is best spent with family rather than worrying about an event that is many years away. That may be true – to a point. However, the future will be here before you know it. Decisions you make now can decisively affect the quality of life for you and your family later on. If retirement seems too far off to think about, don’t look at it as retirement; look at it as independence. Your future financial independence is what is at stake. Financial independence means freedom - the freedom to travel, take vacations, and to do what you wish, within reason, without having to worry about money. Most of you would agree that someday, after your military career is over, it would be nice

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to have this freedom – to be debt free, be able to buy what you need, and not have to get up and go to work in the morning unless you want to. Now that sounds like a goal worth pursuing!

D. Topics to be covered. (USE OVERHEAD #3) This program will cover a number of different topics. We’ll provide a basic introduction to retirement planning, and explain how your military retirement fits into this overall picture. There are actually three military retirement plans; we will describe each and how to determine which you are eligible for. Many of you will face a choice of two different plans, one of which includes a $30,000 mid-career bonus; for those facing this decision, we’ll discuss the advantages and disadvantages of taking this bonus. In addition to regular military retirement, we will also talk about TSP – the Thrift Savings Plan – a new initiative to help military personnel invest for their future. Finally we will wind up by discussing retirement planning in general – how you can use all of this information to plan for your and your family’s future financial independence. We will also give you some resources where you can go to do additional research.

(Instructors note. If time permits and the retirement planning exercise is to be included: In addition, we will also show you how to complete a worksheet that will enable you to determine how much you need to be saving for your retirement.)

II. Employer Sponsored Plans.

A. Retirement Introduction (USE OVERHEAD #4) Retirement planning for any American, military or civilian, at least in our modern era, is based on three elements: the so-called three-legged stool of retirement. The three legs of the stool are: A retirement pension and benefits from an employer, Social Security benefits from the government, and supplemental income provided by an individual’s personal savings and investments. Just as the stool needs three legs to be stable, all three elements are generally needed for a successful retirement. (USE OVERHEAD #5) We will discuss employer-sponsored pensions first. This is generally the most important leg of the stool for most people. This is particularly true for career military. There are two general categories of retirement pensions that are provided as a result of employment:

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B. Defined Benefit Plans. First are so-called “defined benefit plans”. These are set up and funded by a person’s employer. After an individual has worked for a company, usually for a long period of time, he or she becomes entitled to a monthly pension check upon retirement.

• Money is contributed by the employer

• The amount of the pension is usually based on the individual’s salary and total years of service to the company. Normally the pension is a fixed monthly amount, guaranteed for life, although some pensions may include periodic or regular cost of living increases.

• Most older, traditional corporate and government pensions fall into this category – as does military retirement.

C. Defined Contribution Plans. Increasingly over the last 20 years or so, defined benefit plans have found themselves being replaced by so-called “defined contribution plans”.

• With these, employees may contribute up to a certain amount from their salary each month, before tax, into a fund that they control (with some restrictions). Sometimes the employer will match a portion of each employee's monthly contribution.

• With a defined contribution plan, there are no guarantees. The worker will some day receive a lump some, often quite large, that they can invest for future income. The amount employees receive will depend on how much they invest and what their plan’s investments earn.

• The most common defined contribution plans are so-called 401(k) plans (named after the paragraph in the Federal Income Tax code that regulates them).

The military has both types of employer-sponsored plans: a defined benefit plan and a new defined contribution plan. We will discuss them both separately.

III. Military Retirement. (USE OVERHEAD #6) The cornerstone of any career service member’s retirement has always been a military pension from the government – a form of defined benefit retirement plan. There are actually three different retirement systems currently in effect, depending on when you first came on active duty.

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First, there is the so-called “Final Pay” plan; this was the original post-WWII

military retirement plan, actually passed with the Military Reform Act of 1936.

(Most of you wearing khaki are covered by this.) Second is the “High-Three”

modification to this, which started in 1981. Finally, there is the “REDUX” plan,

passed in the MMRA (Military Manpower Reform Act) of 1986, and modified

into the “CSB/REDUX” (REDUX plus Career Service Bonus) Plan. Which of

these plans you may be covered under depends on when you came on active duty.

(Instructor note: In response to any questions, state that the key date is the date the individual initially obligated him or herself to come on active duty the day they first signed on the dotted line. If they had a delayed entry, it is the day they originally signed up. It they had broken service, it is the day they originally signed the paperwork to come in; this may be earlier than their pay entry base date if the latter has been adjusted. To keep the brief moving along, if someone in an unusual situation has further questions, refer the questioner to PSD, while warning them that PSD may not know the answer either. Members with broken service or other unusual circumstances may wish to double check with DFAS and obtain a written determination of their status if necessary.)

A. “Final Pay Plan”(USE OVERHEAD #7) The original retirement system, the “Final Pay” plan, applies to anyone initially entering the military prior to 8 September 1980. Individuals receive a “multiplier” of their monthly base pay, 50% (0.50) if they retire at 20 years of service. The percentage increases at a rate of 2.5% per year for each year over 20 that an individual remains on active duty; this means a retiree would get 75% of base pay after 30 years of service. All military retirees receive an automatic annual cost of living increase each year equal to the consumer price index (CPI).

(Instructor’s Note: The monthly pension amount was originally fixed, and was increased periodically by a vote of the US Congress, usually (but not always) when active duty pay was increased. There were some extended periods where military retirement pay increases fell significantly behind the rate of inflation. In 1974, military retirement was tied in with civil service retirement and social security; all now receive an automatic cost of living increase each year based on the rise of the US Government’s Consumer Price index (CPI) for the previous year. The CPI is calculated each year by the US Department of Labor.)

(USE OVERHEAD #8) Here is a chart showing the effect of the multiplier. As you can see, a retiree receives 50% of base pay after 20 years of service, 52½% after 21 years, 55% at 22 years, and so on, up to 75% at 30 years of service.

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(USE OVERHEAD #9) There is no doubt that military retirement has traditionally been a good benefit, though not quite as good as it had often been portrayed in the civilian community. Most civilians believe everyone in the military can “retire on half pay after 20 years”, without recognizing that retirement pay does not reflect bonuses, housing allowances, and many other parts of military compensation. On average, military retirees can normally expect to receive between 35 and 40% of their final total entitlement (equivalent to a civilian salary) if they retire at the 20-year mark, and probably about 2/3 if they serve 30 years.

B. "High Three" Plan. (USE OVERHEAD #10) In 1980, a change was made to military retirement. Instead of being based on an individual’s final base pay, retirement pay is now based on the average base pay over highest paid three years of service. This is normally the final three years on active duty.

(Instructors note: For some individuals, such as limited duty officers who revert back to enlisted, or those who have been reduced in rank, their highest three years may not be their final three. Some of these may be handled on a case-by-case basis. If there are any questions, refer the individual to PSD or DFAS.)

1. This so-called “High Three” plan applies to anyone who initially came on active duty on or after September 9, 1980. Furthermore, those who came on active duty on or before July 31, 1986 are covered only by this plan; they will not have the option of choosing the Career Service Bonus that we will discuss later. Most service members currently at or approaching retirement eligibility are covered by the “High Three” retirement plan. The only change is that retirement pay is based on the individual’s high three average pay instead of final pay. This represents a light-to-moderate reduction in total retirement benefits, depending on the individual’s circumstances.

(Instructor’s note: The following two overheads, #11 and #12, may be omitted in a normal 50 minute command briefing. They are included to provide additional detail that was requested from test briefings presented to career counselors and senior audiences.)

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2. (OPTIONAL – USE OVERHEAD #11) Let’s look at a quick example of how this “high three” retirement is computed.

• We will use the example of a Chief Petty Officer, and E-7, retiring in early 2000, after 20 years of service.

• During his 18th year, this Chief would have received $2,300 per month in base pay (based on the 1998 pay tables, when the Chief was an E7 with 16 years of service.)

• In his 19th year, the Chief received not only a cost of living increase, but also a pay raise for going over 18; his base pay jumped to $2,449 per month.

• The Chief’s final year on active duty was 1999; as you remember, we had two pay charts for that year; this shows what the Chief was paid for both the first six and the last six months of the year.)

• Figuring the total, and then dividing by 36 months, the Chief’s average base pay over his final 3 years on active duty was $2,470 per month.

(OPTIONAL – USE OVERHEAD #12)

• At this point, we would multiply this “high three” figure, $2470, by the multiplier for the Chief’s number of years on active duty; in this case, since he retired at exactly 20 years service, we would use 50%.

• This means his first year retirement check would start at $1,235 per month.

• Of course, he would get a cost of living raise each year; next January 1st, his retirement check would increase to $1,278 per month, assuming inflation is the same next year as it was in 1999.

• Under the older system, the Chief’s initial retirement check would have been $1,294 per month

• “High Three” does result in a loss of value to a service member’s military retirement package. If an individual retires at the rank he held for the previous three years during a period of low inflation, the loss would be minimal. However, for someone who is promoted during his last three years, or who retires shortly after a major military pay increase, the change could be substantial. Over a lifetime, most retirees will lose between 3% and 11% under “High Three” as opposed to the older “Final Pay” system.

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C. "CSB/REDUX" Plan. (USE OVERHEAD #13)

1. There is one more military retirement plan we need to consider. Actually it is a different computation formula known as “REDUX”. “REDUX” was originally passed as part of the Military Manpower Reform Act of 1986. It applied to anyone entering active duty after 1 August of 1986. There were some significant, and very negative, changes made. First, the multiplier was reduced for anyone retiring with less than 30 years of service; it was cut to 40% for those retiring at 20. The multiplier is increased at 3.5% for each additional year of service; the longer a service member stays in, the smaller the overall reduction under this plan. The second big change was that all annual cost of living raises are based on the CPI minus 1% each year instead of a full COLA.

2. (USE OVERHEAD #14) This is a chart showing the difference in the percent of high-three base pay initially received at retirement under “High Three” and under “REDUX”. (Instructor’s Note: Pause briefly to allow them to read this chart, so that figures “sink in”). As you can see, “REDUX” represents a substantial reduction in initial retirement benefits. The earlier you retire, the greater the reduction.

(USE OVERHEAD # 15) Here is a chart that shows the approximate retirement checks for individuals at various pay grades who retired at the beginning of 2000. (Instructor’s note: If you showed the optional slides on calculating “High Three” retirement, you can indicate that the figure for the E7 @ 20, second from the top, is the Chief from our previous example. As you can see he would get $1235 under High Three, but only $988 per month under “REDUX”.)

3. (USE OVERHEAD #16) Remember, with the “REDUX” calculation, there are two major changes. First is the reduced multiplier. Second, and perhaps more significant, is the cost of living reduction: 1% less per year, every year. There is a one-time “catch up” feature: At 62, the individual’s retired check is increased back up to what he would have received (including full COLA increases) – for one year. After that, the 1% less-per-year feature starts again. All this represents a significant reduction in benefits – up to a 25% loss (over $250,000 in lifetime retired pay) for anyone retiring with between 20 and 22 years of service.

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4. (USE OVERHEAD #17) Under provisions of the Military Manpower Reform Act of 1999, all service members who came on active duty on or after 1 August 1986 are now back under the "High Three" Retirement Plan. However, when they reach 15 years of service, the will get a choice:

• They can remain under the “High Three” Plan – OR

• They can elect instead to have their retired pay calculated under the newer, less generous “REDUX” formula– and, also receive a one-time, lump sum $30,000 CSB (Career Status Bonus), to be paid in full at the 15 year point.

( Instructor's Note: Take note of the asterisk. Most, but not all, service members will be offered this choice. Anyone who has been reduced due to disciplinary action, those who have reached high tenure, or anyone else, who is deemed likely to be separated involuntarily prior to reaching 20 years, will not be offered this choice and will remain (should they later qualify for retirement) under the “High Three” plan.)

a. (USE OVERHEAD #18) “CSB/REDUX” is a package deal. Those who elect this option must remain on active duty until 20 years (or pay back a portion of the bonus – 20% for each year prior to 20 that they fail to complete). The bonus is fully taxable; for members in the 15% tax bracket, this means they will net $26,500 if they take the bonus in cash. Most military members (those above E-6, or most with working spouses) are in the 25% bracket, leaving a net of $21,600. Members will be able to shelter up to $10,500 of this bonus in the Thrift Savings Plan, which we will cover later in this briefing. (Instructor’s note: Service members reaching 15 year point early in 2000, before TSP is implemented, will be permitted to delay receipt of the entire bonus if they wish for several months as necessary until TSP is available.)

(USE OVERHEAD #19) This choice is a one time, irrevocable decision, to be made between the 14½ and 15-year point. The official position on the DoD web site is as follows: “Both options have their own merits. Neither is universally better than the other. Which option is more advantageous can only be determined by each individual for his or her own unique circumstances and preferences.”

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b. (USE OVERHEAD #20) There is an advantage in taking the Career Service Bonus – immediate cash, to use in any manner the service member wishes. This could be for an investment, for seed capital to start a second career business, for education, or (less wisely) to repay debts or even to purchase a new car. Each of these opportunities has limitations. (USE OVERHEAD #21) There are also substantial disadvantages to taking the CSB. The main disadvantage is a major, permanent reduction in retired pay. This also means a reduction in survivor benefits for a surviving spouse. Perhaps the greatest risk is the risk that an individual may spend some, most, or even all of the bonus, leaving very little to show for it. The best way to look at the CSB may not be as a bonus, but rather as a loan - a relatively high interest loan against your future military retirement, to be repaid out of each and every retired check for the remainder of your and your spouse’s lifetimes.

Instructor’s note: Additional information concerning selections of the CSB are as follows:

• For those who are retired from the Navy on disability, previous selection of CSB/REDUX would result in permanent reduction of tax-free disability retirement pay, just as it would for non-disability retired pay.

• In cases where retired service member received disability compensation from the VA, total compensation in retirement would be reduced by the same amount under “CSB/REDUX” as under “High Three” since there remains a dollar-for-dollar reduction in retired by to offset any VA disability payments concurrently received.

• The best potential use for the bonus would be for investment. However, the bonus money would have to be invested relatively aggressively to even come close to providing the difference in retirement pay. Most reputable financial planners will use between 10% and 11% as the maximum long-term growth rate that can be expected from a diversified all-stock portfolio for even an experienced investor. Higher returns can be achieved only by taking on a level of risk that is well above average. Even at 11%, most retirees with less than 25 years on active duty will come up short under the "REDUX plus Bonus" plan.

• Some individuals may wish to use the bonus to pay for education expenses for themselves, their spouses, or their children. In most cases, there is a possibility of scholarships; if loans are needed, there may be many better, lower cost alternatives.

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• Debt repayment: Some service members may have a large amount of consumer debt at an unattractive interest rate. Even here, however, there are usually better options, ones that do not involve mortgaging the family’s long- term future.

• Finally, despite the best of intentions, there will always be a strong temptation to spend at least part of the bonus. This would probably represent the least wise use of the bonus money.

• Implications of CSB/REDUX in cases of divorce are still unclear. Presumably if a career service member were to divorce after receiving the bonus, any division of retired pay with the former spouse would be based on the reduced REDUX computation. However, if a service member were to divorce prior to the 15 year point under a decree that stipulated an eventual division of retired pay, that division could obviously be affected by the decision to elect CSB/REDUX, and would have to be taken into account. Issues involving divorce and retired pay tend to be complicated and emotional, and are definitely beyond the scope of this presentation. If there are questions, state that many of these issues have not yet been resolved, and refer the individual to legal for additional information.

c. (USE OVERHEAD #22) The Department of Defense has provided a web site (), which has important information on the two retirement plans. It includes the details of each plan, sample case studies, and even a personalized calculator to assist individuals in making their decision. (Note there is no “www” prefix on this site).

(USE OVERHEAD #23) Included on that web site are the story of two brothers, Harry and Richard; identical twins, they came on active duty at the same time and are now facing the decision of “High Three" or "CSB/REDUX”? It is a good comparison, one you should read before making your decision. Rather than repeat their stories here, however, we’re going to introduce two other service members: Chief Fastrack and Petty Officer Independence.

(USE OVERHEAD #24) Chief Fastrack has been in the Navy 15 years and is a stellar performer; he has already been selected for promotion to senior chief. He has his college degree, is on track for future promotion; he plans to remain in the Navy a full 30 years, and his family concurs with that decision. In addition the family is in good shape financially: they already have IRAs and other investments, and have some investment knowledge. Chief Fastrack’s uncle is a licensed Certified Financial Planner. Chief Fastrack would like to take the

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bonus and invest all of it. This is an example of an individual who might want to consider electing to take the CSB and invest the proceeds to replace the retired pay he would lose under REDUX retirement calculation.

(USE OVERHEAD #25) Petty Officer First Class Independence also has 15 years on active duty, and is also a good performer; he would like to make Chief, but it’s a long shot – promotions in his rate are pretty scarce. Whether he makes Chief or not, he definitely wants to get out of the Navy at 20. He is planning to initially work and go to school. He has never invested and the family has no savings. Although he wants to start investing, his family’s main goals are to pay off all existing consumer debts prior to retirement, and save up for a down payment on a home. The family has two older cars, one of which is overdue for repairs; they would like to replace it with a new one. This is the perfect example of an individual who should not, for one moment, ever consider taking the bonus. Remaining under "High Three" would definitely be the best option for Petty Officer Independence and his family.

D. Retirement Plan Choice - Review. (USE OVERHEAD #26) For review, here are a few points to consider:

• This is a one time, irrevocable decision.

• The bonus, if chosen, will be taxed

• The biggest difference in retiring under the "REDUX" formula is not that you start out with less money at 20 years; it is, rather, the 1% less cost of living raise you receive each year. (That 1% difference will “eat you alive” in the long run!)

• Those who get the worst deal if they take the bonus are those who retire at 20. The longer you remain on active duty, the better deal (relatively) the bonus becomes.

(USE OVERHEAD #27) This completes the section on military retirement. Are there any questions before moving on to TSP?

IV. Thrift Savings Plan (TSP). (USE OVERHEAD #28)

A. TSP Introduction. We are continuing on the subject of employer sponsored pension plans. As you recall, there are two broad types of plans: defined benefit, and defined contribution. The military now has both types of plans available:

• A defined benefit plan: regular military retirement. This is either the "High Three" or "CSB/REDUX " for most service members, and

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• A defined contribution plan - the new TSP (Thrift Savings Plan)

B. TSP Features and Benefits. (USE OVERHEAD #29) The Federal Government's Thrift Savings Plan, available as part of Civil Service Retirement for a number of years, will be offered to military personnel, with a projected start date of 1 October 2001. This will be open to all active duty military, regardless of when they came on active duty or which retirement system they may be covered by. (There may be a brief time-in-service requirement - most likely 6 months or less - prior to becoming eligible for enrollment.) Like all defined contribution plans, TSP allows individuals to deposit a portion of their pay, pre-tax, into a tax-deferred investment account. Military personnel will be able to put up to 5% of base pay per month plus the total amount of any special pays or bonuses into their TSP account. The amount they put in will not count as taxable income for the year, and will not be included as part of wages on their W-2 statements. There is a maximum limit, currently $10,500 per employee per year, that an individual can put into a defined contribution plan - this applies to both civilians and military personnel. There is no government match for military TSP.

(Instructor's note: Individuals in government who were requesting that Congress approve TSP for the military were also, at the same time, advocating the restoration of the older military retirement system. In order to get both passed, TSP was justified as a tax deferred savings plan to increase retention, particularly among mid-career personnel rather than a second retirement plan. This is the reason there is a 5% limit on contributions and no government match. Some older US Government Civil Service employees, who are still under an older and more generous retirement plan for the Civil Service, have a similar limitation on their TSP contributions. There is a provision in TSP allowing for a future government match and/or increased contribution limits as a retention tool for individuals in critical or greatly undermanned specialties; these will be determined later on a case-by-case basis.)

(USE OVERHEAD #30) All money deposited belongs to the service member; however, none can be withdrawn while on active duty. Upon separation or retirement, the individual can take the money in cash (minus tax withholding), keep the money in TSP until retirement, or transfer the whole amount to a new employer's 401(k) plan or to their own IRA.

(Instructor's note: Usually, a Rollover IRA would be established. This must be a Traditional IRA; rollovers to a Roth IRA are not permitted. After the rollover is completed, an individual could then convert that to a Roth IRA; however, the full amount of the account would count as taxable

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income for that year. There are substantial penalties for taking the money out entirely prior to age 59 1/2; however, while a service member remains on active duty, there are options for securing relatively low-cost loans from the plan.

C. TSP Options. (USE OVERHEAD #31) TSP has several investment options. They include:

• the "C" Fund (The Common Stock Index Investment Fund, which invests in stocks in the S&P 500 Index),

• the "F" Fund (The Fixed Income Investment Fund, which invests in government and corporate bonds and is designed to track the Lehman Brothers US Aggregate (LBA) bond index), and

• the "G" Fund (The Government Securities Investment Fund, which invests in special, non-traded US Treasury securities guaranteed against any loss).

There are also two new options that will begin operation this year:

• the "I" Fund (The International Stock Index Fund, which will invest entirely in non-U.S. companies), and

• the "S" Fund (The Smaller Company Stock Index Fund, which will invest in small and medium size companies in the U.S.).

TSP is participant directed; each individual will be able to choose which of these 5 funds they wish their monthly contribution to go to. They will also be able to transfer money from one fund to another on a periodic basis.

D. TSP Summary. (USE OVERHEAD #32) Covering all the details of TSP are not possible with the limited time we have for this briefing. The regulations dealing with TSP will be the same in most cases as those dealing with the existing TSP for government employees. Some minor details may be different and are still being worked out. TSP will be a great deal for all service members; even a small contribution ($50 per month at an 8% annualized rate of return) would give a service member an extra $30,000 at the 20-year point. TSP is fully explained in detail on the government's TSP web site: . Information on the plan as it pertains specifically to the military is expected to be available by mid-year. Are there any questions on TSP?

V. Social Security. (USE OVERHEAD #33) As you may remember from the start of this briefing, Retirement Planning is based on a three-legged stool. We have covered the most important leg - employer sponsored pensions. However, there are still two other legs we need to consider.

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(USE OVERHEAD #34) The second leg of retirement is Social Security. Although some may worry about Social Security, it will remain an important part of retirement planning for most Americans. Military personnel contribute to Social Security, and are eligible for benefits upon final retirement. The age for receiving full benefits is gradually being increased from 65 to 67 years old, and at least some Social Security benefits will be taxable for most military retirees. Every individual should obtain a copy of his or her personal Social Security Benefits Statement as part of his or her long range retirement planning. The Social Security Administration is in the process of mailing this out to all Americans over the next few years. You may request one by phone or by logging on to retire. You can also get a rough estimate of your future benefits from this web site, as well as general information about Social Security.

VI. Personal Savings. (USE OVERHEAD #35) Personal savings and investments represent the critical third leg to a financially successful retirement. Individuals have many options, and it is beyond the scope of this program to go into investing in detail here. However each active duty service member and spouse should strongly consider each opening a Roth IRA. Although you receive no tax deduction when you contribute, the money grows non-taxed. At retirement all the money can be withdrawn tax free, forever. Although designed for retirement, some money can be taken out of a Roth IRA after as few as 5 years, with no taxes or penalties due. Roth IRAs are great deals for just about everyone.

(Instructor's note: See the Savings and Investment SOP for additional Roth IRA information. Also, you may want to use this opportunity to briefly advertise the next NFSC Savings and Investment seminar and/or to recommend they visit their CFS or call an NFSC FE for information on additional resources for investment education.)

VII. Retirement Planning.

A. Motivation. (USE OVERHEAD #36) These three legs - military retirement benefits, Social Security benefits, and your personal investments, will be the cornerstones of your future financial independence. Planning for retirement is important.

• Individuals and families that fail financially usually don't plan to fail…

• They usually fail to plan.

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B. The Changing Face of Retirement. (USE OVERHEAD #37)

1. Military personnel have always retired younger than their civilian counterparts; however, this was usually to a second career job. Final retirement was often much like that of their civilian neighbors: a brief period, often of declining health, where they were too sick to work and too well to die. Retirement usually lasted 5-10 years at most, and was spent living with extended family members or possibly in a sparsely equipped retirement home. Limited financial resources were required. For this reason, financial counselors and advisors formerly told people that they could normally expect to need 60-70% of their final income while working after they retired.

(USE OVERHEAD #38) Today, however, there is a new retirement model. People are living longer and healthier lives. Many wish to retire early, and to remain independent during their retirement. They want to travel, pursue their favorite activities, and enjoy their retirement, which now could last 20-30 years or more. In the future, it may be common for a

military retiree to spend more years in full retirement than he or she did while on active duty! Many financial planners are now urging people to realize they may need 100% of their pre-retirement income, at least in the early years of retirement. Some costs, those associated with work and housing, may decline, but medical and entertainment costs may very well increase.

2. (USE OVERHEAD #39) There are actually several phases to retirement.

• In the first, the active phase, an individual or couple will want to enjoy life, doing those things that they were unable to do when both were working. This costs money; they may need 100% + of pre-retirement income during this phase, which could last 10-15 years.

• In phase two, retired couples generally tend to adopt a more modest lifestyle. They spend less time traveling and more time close to home, with nearby family. Physical condition, while remaining generally good, is such that activity slows down. Children, and even in some cases grandchildren, are already grown. In this period, expenses will normally decline over a period of time, until that individual or couple may find they are spending as little as half what they were a few years earlier. This phase can also last for an extended period of time.

• Often, however, expenses will again increase sharply in the third or final phase of retirement, which is generally defined by the costs of medical and nursing home care.

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C. "Ball Park" Estimate. (USE OVERHEAD #40) Retirement planning has definitely become more complicated. It can be long and detailed. However, it is easy to get started, and there are many resources available to help. One is ASEC: the America Savings Educational Council, a non-profit organization dedicated to promoting saving and investing among Americans. At their web site at they have a two-page "Ballpark Estimate" form, a highly simplified but surprisingly accurate way to get an initial estimate of whether you are saving enough for retirement.

(Instructor's note: If time permits, you may do the retirement planning exercises. First, distribute handout - the "Ballpark Estimate" form. OVERHEADS #41, 42, and 43 are OPTIONAL; they have specific instructions to assist military personnel in completing the handout. If used, simply put up and read the instructions off each of the three frames. Give attendees time to complete the form; an additional 5 minutes should be sufficient in most cases.)

Remember, the ASEC form is only a rough estimate for initial planning - to get you started. Later on, particularly as you start approaching transition, you may want to begin detailed planning.

D. Retirement Planning Resources. (USE OVERHEAD #44)

1. There is a wide range of resources available to help. Financial Education Specialists and the TAMP staff at the Navy Family Service Centers are a good place to start. The RAO (Retired Affairs Office) may have information on other resources. The Navy Mutual Aid Association often provides assistance with some aspects of estate planning. Commercial financial professionals in the civilian world, including those at DoD affiliated credit unions, may offer comprehensive financial planning services. With the advent of the internet, there is now a wide range of retirement planning assistance available via computer. Some on-line services charge fees of up to $500 or more; others have do-it-yourself planning tools available at little or no cost.

2. (USE OVERHEAD #45) If you do decide to seek professional assistance, use caution. There are a many good stockbrokers, insurance agents, and independent financial planners, but not all are fully knowledgeable about retirement planning. Most should provide a free initial consultation; beyond that, some work on a fee basis, while others are paid through commissions on products they sell. Find out how the professional you work with will be paid; remember, you do not get something for nothing. Ask what education, training, or special credentials your planner might

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have. A licensed CFP (Certified Financial Planner) for example, has been though a detailed advanced program (generally lasting two years), passed a rigorous examination, and agreed to abide by a comprehensive set of planning standards and a code of ethics. It might be worth seeking out a CFP when it comes time to do your retirement planning. In any event, if you are seeing a financial professional, always check at least two and compare their recommendations. Give yourself time to make the best decision. Remember, it's your money; don't be pressured into anything.

3. Internet Resources:

a. (USE OVERHEAD #46) There are many retirement planning calculators on the internet that enable you to do at least some of your planning on your own. Use caution dealing with these sites as well. Remember, the results will only be a good as the data you input. Many of these calculators do not accurately reflect the impact of an inflation adjusted employer pension, such as a military retirement check. Always use realistic assumptions. The calculators will usually ask, at a minimum, that you enter a rate of inflation and an expected rate of return on your investments. A rate of inflation between 3% and 4% per year will accurately reflect most time periods of 20 years of more. For long-term rates of return on your investments, a reputable financial planner would use, at a maximum, 9% to 10% per year before retirement, and 7% to 8% during retirement. The calculator on the government web site “defaults” to a 3.5% rate of inflation and 8% rate of return. These are good starting points.

(Instructors Note: There may be a few individuals in your audience who have some experience in investing; they may feel the above figures as too conservative. Quite the contrary, they are very realistic. The long-range rate of return for common stocks over the past 73 years that accurate records have been kept is slightly less than 11%, not the 15% or more per year that some investors made in their mutual funds during the decade of the 1990s. If you take the long term average and deduct for expenses, and the fact that few investors will match the market, a 9-10% annual rate for younger investors becomes realistic, though by no means a sure thing. Even this assumes an individual has all his or her retirement money in stocks or stock funds, and is either an experienced investor or is working with a good financial advisor. (For shorter time periods, even these figures may be too optimistic. Some of the world’s best investors – such as Warren Buffett – predict an average rate of return for common stocks in the 5-6% range for the next 10 years.)

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b. (USE OVERHEAD #47) Read or briefly paraphrase the disclaimer.

c. (USE OVERHEAD #48) Here some web sites you may find useful. Again, they are only a few of the literally hundreds that deal with issues relating to retirement planning. The list includes the sites we have already mentioned today.

(Instructor's Note: Detailed descriptions of these sites are included for benefit of the instructor and may be omitted from the presentation in the event of time constraints)

• The first is the DoD web site, . This site includes an explanation of the new "CSB/REDUX” retirement plan, and compares it with the older "High Three" plan. It includes sample case studies and a calculator to enable you to do personal planning. The site also has information about the new military TSP.

• Two other government sites – one for the Thrift Savings Plan () and the other for the Social Security Administration () will enable you to find important information on these programs.

• Many sites have retirement calculators. The very basic one at we have already mentioned. One relatively accurate (and free) commercial planner is offered at . This is the web site for Smart Money, the personal finance magazine from Dow Jones Company, which also publishes the Wall Street Journal. For sophisticated investors, the planning tool at will allow them to plan their financial future in more detail. This site, started by a Nobel Prize winning economist, offers fee-based services; however, their retirement planner is free of charge.

• There are many commercial sites that provide retirement planning education. Virtually all of the major mutual fund companies have such information available. (If you currently own a mutual fund you may wish to check their site out). One such site is , which has a subsection know as “Vanguard University”, a free site with information on retirement planning and a wide range of other financial topics. Another site is . Morningstar is the largest commercial mutual fund rating service. Some of their services are available

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only for a monthly fee; however, they still have much of value that is free. They offer a number of bulletin boards, on which investors may ask questions and receive answers from other more experienced investors or, occasionally, Morningstar analysts. While one must always evaluate with skepticism any information

received over the internet, these boards appear to have a higher quality of content them most. Investment Basics, Investing for Retirement, and Investing During Retirement, are forums that often contain valuable information.

• Finally, there a final government site, aoa.retirement/fpfr.html. This site provides links to other web sites sponsored by government, non-profit, and commercial organizations, which deal with all aspects of retirement financial planning and other retirement related issues. Sites listed include most of those we have already mentioned. This site, run by the US Department of Health and Human Services, appears to be updated only sporadically; a number of links are no longer current. Still, it remains a valuable reference.

(Instructor’s note: If you are completed with this explanation and members of the audience are still copying down web sites, and time is short, offer to go back to this frame after the presentation is completed.)

VIII. Summary. (USE OVERHEAD #49) We first introduced retirement planning, and explained how, financially, retirement is based on a 3-legged stool: employer sponsored pensions, Social Security, and personal investments. We then discussed military retirement - the three different retirement plans for service members, including the new "REDUX plus Bonus" plan. For those eligible, we discussed the pros and cons surrounding the one time decision to take that plan plus the bonus or remain under the "High Three" plan. We introduced the Thrift Savings Plan/TSP. Finally, we presented information and resources to enable you to do your own planning for retirement. Remember, those who fail to plan are really planning to fail. It’s your choice and your future.

Questions / Comments?

Revised 1/01

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